Hawaiian Electric Industries, Inc. (HEI) — Q3 2016 Form 10-Q
Business context and period: Unaudited results cover the three and nine months ended September 30, 2016, compared with 2015. HEI’s principal businesses are Hawaiian Electric and American Savings Bank (ASB). Hawaiian Electric is wholly owned by HEI.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| HEI revenue | $646.1 million | $717.2 million | $1,763.3 million | $1,979.0 million |
| HEI operating income | $105.4 million | $97.1 million | $259.7 million | $239.3 million |
| HEI net income for common stock | $127.1 million | $50.7 million | $203.6 million | $117.6 million |
| HEI diluted EPS | $1.17 | $0.47 | $1.88 | $1.11 |
| Hawaiian Electric net income for common stock | $47.0 million | $43.0 million | $108.2 million | $102.7 million |
| ASB net income | $15.1 million | $13.5 million | $41.1 million | $39.8 million |
- HEI’s Q3 and nine-month net income included a $90 million gross merger termination fee from NextEra Energy (NEE). The company reported approximately $64 million of related net income impact in Q3, including the fee, expense reimbursements and tax benefits, net of merger-related costs. This one-time item materially lifted HEI’s reported earnings.
- HEI revenue fell 10% in Q3 and 11% year to date, principally because lower electric-utility revenue from reduced fuel prices outweighed bank revenue growth. Utility fuel expense declined substantially, while utility operating income increased.
- ASB’s nine-month net interest income rose to $153.2 million from $139.9 million. However, provision for loan losses increased to $15.3 million from $5.4 million; management cited portfolio growth and specific commercial-credit downgrades. ASB’s nine-month net interest margin was 3.59%, versus 3.52%.
- HEI’s Q3 2016 dividend was $0.31 per share; the nine-month total was $0.93, unchanged from 2015.
Cash flow, balance sheet and liquidity
- For the first nine months, HEI generated $408.9 million in operating cash flow, used $535.7 million in investing activities and generated $110.7 million in financing activities. Operating cash flow included NEE’s $90 million termination fee. Capital expenditures were $259.2 million.
- At September 30, HEI had $284.4 million cash, $12.20 billion total assets, $10.10 billion liabilities and $2.07 billion shareholders’ equity. Long-term debt excluding bank debt was $1.58 billion; nonbank short-term borrowings were zero. ASB deposits were $5.38 billion and other bank borrowings were $265.4 million.
- Hawaiian Electric’s nine-month operating cash flow was $275.3 million; capital expenditures were $250.7 million. At quarter-end it had $23.0 million cash, $1.28 billion long-term debt and $21.0 million short-term affiliate borrowings. Common equity represented 57% of its reported capital structure.
- HEI and Hawaiian Electric each reported undrawn revolving credit facilities of $150 million and $200 million, respectively, with terms extending to 2019. Management said expected operating cash flows, financing access and available liquidity should cover forecast needs. ASB reported $1.8 billion of unused FHLB borrowing capacity and capital ratios above regulatory well-capitalized minimums.
Material changes, outlook and risks
- The Hawaii PUC dismissed the proposed NEE merger application in July 2016, and NEE terminated the merger agreement. The associated ASB spin-off was cancelled. S&P and Fitch affirmed ratings but removed positive watch status; Moody’s downgraded commercial-paper ratings at HEI and senior unsecured debt ratings at Hawaiian Electric. Management identified loss of NEE’s financial and technical support as a potential source of higher costs, longer project timelines and higher cost of capital.
- The Utilities withdrew merger-conditioned LNG supply and generation applications, including proposed LNG-related commitments of approximately $341 million, $117 million and $859 million. They said they would continue evaluating options for cleaner, more modern generation.
- Management forecast 2016 utility net capital expenditures of approximately $340 million, excluding the proposed HEP acquisition. Utility full-year electricity sales were expected below 2015 levels; 2016 O&M was expected to be 2% lower than 2015. HEI said it currently expected to maintain its dividend, subject to quarterly Board review.
- The Utilities remain committed to Hawaii’s 100% renewable-energy goal by 2045. Revised power-supply plans were under PUC review, with a further filing and scenario analyses due in December 2016. Management noted that rising intermittent renewable generation can strain grid capacity and reliability and may require curtailment or constrain new interconnections.
- Regulatory matters include Hawaii Electric Light’s request for a $19.3 million rate increase and Hawaiian Electric’s notice of intent to file a 2017 test-year rate case. The PUC approved the Utilities’ ERP/EAM project subject to a $77.6 million cost-recovery cap and a requirement to pass at least $244 million in projected savings to customers over 12 years. The proposed $84.5 million HEP plant acquisition remained subject to PUC approval.
- Contingencies include ongoing DOJ negotiations concerning potential Clean Air Act violations, for which the Utilities could not estimate any settlement amount; environmental investigations and remediation with recorded reserves of $3.6 million for the former Molokai site and $4.4 million for Waiau PCB matters; and $20.1 million of pole-cost receivables from Hawaiian Telcom, against which $3.9 million of accrued interest was reserved. Management expected to collect at least $16.2 million.
- Other risks include fuel-price and supply changes, regulatory cost recovery and rate-case outcomes, capital-project execution, weather and climate impacts, bank credit quality and interest-rate sensitivity, and the possibility that future information could require consolidation of one or more IPPs.
Important facts for investors to verify
- Separate recurring operating results from the $90 million merger termination fee and related tax and reimbursement effects when assessing earnings and EPS.
- Track PUC decisions on rate cases, renewable-energy plans, HEP acquisition, project cost recovery and grid modernization, and compare outcomes with management’s capital-spending and savings expectations.
- Monitor ASB’s loan-loss provisions, charge-offs, delinquencies and credit concentrations; the allowance for loan losses rose to $58.7 million from $50.0 million at year-end.
- Review utility liquidity, financing costs and credit ratings following the merger termination, as well as the timing and recoverability of major capital investments.
- Follow developments in environmental and legal contingencies, Hawaiian Telcom receivables, IPP contract negotiations and any potential change in IPP consolidation conclusions.